Texas housing markets (still) aren’t overvalued

The Austin Board of Realtors reported that the March 2015 median price for single family homes was $255,000, a 10% year-over-year increase. This is a record high for Austin homes, so it isn’t surprising that some are saying our market is overvalued or in a bubble.

Still, you can’t just look at appreciation and say the market is overvalued without looking at the reasons for the rise in prices. In relation to the other desirable cities that are creating 30,000+ jobs annually, our values are on the inexpensive side.

Texas has never led the nation in real estate appreciation. For the last forty years our state has averaged just under 4% annual according to Texas A&M Real Estate Center. Last year we saw 7.12% annual appreciation in Texas, according to FHFA House Price Index (HPI). During the housing bubble, Texas was at the bottom of real estate appreciation of all states, as you can see on this interactive map.

We’ve had a couple of good years in Texas after recovering faster than the rest of the nation. Speculation is hard in Texas, because the annual returns are not as great as in other markets. The speculation that many investors look for is not available in Texas; namely, those investors betting on appreciation rather than the fundamentals of income producing properties and/or historical sales prices. As long as job growth remains strong, Texas’s housing market likely won’t tank. Folks betting on appreciation might get hurt, but others will be fine.

It’s all about jobs

Again, job creation is driving demand and home values. From March 2014 to March 2015, Texas total nonfarm employment increased by 327,500 jobs, or 2.8%. The Texas unemployment rate was 4.2% for March 2015, down from 5.3% in March 2014. The Texas unemployment rate has been at or below the national rate for 99 consecutive months. Over the same period, Dallas had 4% job growth, ranking 5th nationally. The other major Texas metros missed the top 10: San Antonio grew by 3.4% (14th), Houston grew by 2.9% (22nd), Fort Worth grew by 2.6% (28th), and Austin by 2.5% (29th).

Whether the stronger home price appreciation in some Texas markets will lead to a bubble will depend on whether the employment growth here is sustainable in the long term. Most analysts think so. A continued drop in oil prices, or even a tech bubble burst, could curb demand for housing in hot Texas markets, and take some of the air out of the steady increase in values. Texas was among the first states to emerge from the 2007-09 Great Recession, surpassing its pre-recession employment peak in late 2011. Since 2000, change in Texas employment is up 24.9%, while the rest of the country is up 4.7%. Since 2000, Texas has created 2 million jobs, while the rest of the country combined has produced 5 million. As a whole, 29% of all new jobs since 2000 were created in Texas.

Remember the financial meltdown in the US was caused in part by not following the fundamentals of real estate. For every three jobs there should be one home start. Texas and its metros continue to be right in line with that. Those states where appreciation was in the mid 40% annually were pure speculation. It was a strong run, but based on non-sustainable fundamentals. Texas continues to have the fundamentals in building and consuming the shelter available presently.

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, emphasizes Texas’s comparatively rapid rate of job creation. Over the last twenty-three years, the number of jobs has increased twice as fast in Texas as it has in the rest of the country. Many people might imagine that most of those new jobs pay low wages, but that turns out not to be true. To be sure, Texas has more minimum-wage jobs than any other state, and only Mississippi exceeds it with the most minimum-wage workers per capita. However if you consider cost of living, the Texas wages are better than most.

According to the Dallas Fed, only 28 percent of the jobs created in or relocated to Texas since 2001 pay in the lowest quarter of the nation’s wage distribution. By comparison, jobs paying in the top half account for about 45 percent of the new jobs in Texas.

This means that Texas has been creating or attracting middle and high wage jobs at a far faster pace than the rest of the country taken as whole. For example, between 2001 and 2012, the number of Texas jobs in the upper-middle quarter of the nation’s wage distribution increased by 25.6 percent. This compares with a 4.1 percent decline in the number of such jobs outside of Texas. Though coming off a comparatively small base, Texas has also outperformed the rest of the country in its growth of high-paying jobs.

That’s a big deal. During the last decade, the country as a whole experienced zero net job creation, and the decline in middle-class jobs is arguably the largest single threat to the national economy’s viability. Only 65 counties out of just over 3,000 have fully recovered real estate values, employment, and GDP to prerecession numbers. Nationally the country continues to struggle. Much of these statistics come from an article from the Federal Reserve Bank of Dallas, 1Q14.

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Appreciation isn’t the only factor in determining if a market is overvalued. Here are some other metrics to watch:

  • Job creation vs. home starts (a ratio of three jobs to one home start is balanced)
  • Resale housing inventory: less than six months is considered a sellers’ market
  • Less than 24 months supply of new home starts
  • Less than 24 months supply of lot inventory
  • Rental occupancy residentially above 90% with no concessions
  • Double digit appreciation for more than three years

When there has been job creation but an absence of developing and building there will be a need for more inventory as the market plays catch up. That is where our Texas metros are; playing catch up, not overvalued or undervalued. With true demand from population and employment growth the metro markets have a ways to go to catch up.

Those of us who have been watching and analyzing Texas real estate will be the first to tell you that we don’t know the future. History has taught us differently. Even if Texas metros are a good market now doesn’t mean in 18 months or 5 years that it still will be a good market. But by reviewing past regional history against national metrics, we can say confidently that the regional market will be strong for at least the next three years based on jobs, population, affordability, and demographics.

The speculative building that we saw regionally in the 80’s here in Texas and the same in the sand states (California, Nevada, Arizona and Florida) in the early 2000’s is not present today. Double digit appreciation as a region is not present. Are these things that bear watching? Absolutely. Remember that although the headline of “x market is overvalued” gets attention, to most long term analysts and economists appreciation is just one of many statistics, and all the fundamentals need to be reviewed to make a true assessment.

 

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